Tax Jakarta Client Alert September 2015 Regulation on Debt-to-Equity ratio is finally issued after 31-year wait After 31 years, on 9 September 2015, the Minister of Finance finally issued Regulation Number 169/PMK.010/2015 on Determination of Debt-to-Equity Ratio ("DER") for Companies to Calculate Income Tax ("Regulation 169"). Regulation 169 stipulates that the maximum allowable DER for income tax purposes is 4 to 1. Initially, the DER for income tax purpose was regulated in a 1984 Minister of Finance regulation. Under that regulation, the maximum allowable DER was 3 to 1. But the 1984 regulation was postponed in 1985 and there was no further regulation until Regulation 169. Regulation 169 became effective on 9 September 2015. But specifically for income tax calculation purposes, it will only become effective on 1 January 2016. In the meantime, the DER threshold under Regulation 169 is supposed to be used as the maximum DER for taxpayers who wish to apply for a tax holiday facility under Minister of Finance Regulation No. 159/PMK.010/2015 on Income Tax Reduction Facility. Please click here to refer to our client alert on tax holiday if you would like to know more about this. Taxpayers that are subject to Regulation 169 Regulation 169 is only applicable for corporate taxpayers whose capital consists of shares. Generally, there are six types of corporate taxpayers that are not subject to this regulation, i.e. corporate taxpayers engaging in: a. banking sector; b. financial institution sector; c. insurance and re-insurance sector; d. mining and oil-and-gas sector, which is based on production sharing contracts, contracts of work or other mining cooperative agreements that do not set out a DER requirement; e. business activities where the income is subject to final income tax; and f. infrastructure sector. Definition of Debt and Capital Under Regulation 169, debt is the average of debt balance at the end of each month of a fiscal year. Debt includes short-term debt (including interest bearing trade payable) and long-term debt. Tax 2 Regulation on Debt-to-Equity ratio is finally issued after 31-year wait September 2015 Capital is the average of capital balance at the end of each month of a fiscal year. Capital includes equity as set out in the applicable Indonesian financial accounting standards and non-interest bearing loans from related parties. Failure to meet the 4 to 1 DER If corporate taxpayers that are not exempted from Regulation 169 cannot meet the requirement under this regulation, their deductible borrowing costs will be limited to an amount that is in line with the 4 to 1 DER. Borrowing costs are defined as follows: a. interest on borrowings; b. discounts and premiums related to loans; c. additional costs related to financing acquisitions; d. financial charges in a financial lease; e. additional charges due to a loan guarantee; f. foreign exchange gain/loss related to loans in foreign currency, as long as the foreign exchange gain/loss is a result of interest costs and costs set out in points b to e above. Please also note that the deductibility of the borrowing costs set out above should also take into account Article 6 and Article 9 of the Income Tax Law on deductible and non-deductible expenses. It should also take into account whether the amount of the borrowing costs has been set at arm's length as stipulated under Article 18 of the Income Tax Law. Addition obligation imposed by Regulation 169 Regulation 169 also requires taxpayers that have foreign loans from private parties to report the amount of the loan to the Director General of Tax. If the taxpayers do not report the loan, the borrowing costs related to the loan cannot be deducted for tax purposes. The procedure to report the loan will be regulated further in a regulation that will be issued by the Director General of Tax. Conclusion Corporate taxpayers that are subject to this regulation should look at their financial position, and try to have a DER of not more than 4 to 1. As 2016 is a year of law enforcement in the tax sector, it is likely that the Indonesian tax authority would strongly enforce Regulation 169, and impose corrections on deductible borrowing costs in tax calculations of companies with a DER of more than 4 to 1 DER. It is stated in Regulation 169 that the Director General of Tax will issue implementing regulations. We will monitor developments and issue client alerts when appropriate. www.hhp.co.id For further information please contact Ponti Partogi Partner +62 21 2960 8888 firstname.lastname@example.org Ria Muhariastuti Senior Associate +62 21 2960 8574 email@example.com Nalphian Seotang Associate +62 21 2960 8565 firstname.lastname@example.org Hadiputranto, Hadinoto & Partners The Indonesia Stock Exchange Building, Tower II, 21st Floor Sudirman Central Business District Jl. Jenderal Sudirman Kav. 52-53 Jakarta 12190 Indonesia Tel: +62 21 2960 8888 Fax: +62 21 2960 8999 ©2015 Hadiputranto, Hadinoto & Partners. All rights reserved. Hadiputranto, Hadinoto & Partners is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. 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